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2 Awful Retail Stocks for Retirees

The meltdown in the retail sector makes Guess and Ralph Lauren high-risk plays.

Retirees should invest in well-established companies with wide competitive moats, healthy cash flows, generous dividends, and sustainable payout ratios. But finding companies that fit all those criteria can be tough.

In a previous article, I noted that Barnes & Noble, Vector Group, and Las Vegas Sands all failed those tests due to their high valuations, wobbly business models, and unsustainable payout ratios. Today I'll focus on two companies in the retail sector which retirees should also avoid -- Guess(NYSE:GES) and Ralph Lauren(NYSE:RL).

Image source: Getty Images.

Guess

Shares of Guess have fallen 60% over the past five years due to sluggish sales growth and waning profitability. The apparel retailer has struggled to counter "fast fashion" apparel players like H&M and Zara, which use analytics to read fashion trends, rotate their products faster, and sell their products at lower prices. Guess is also struggling to match the e-commerce muscle of its direct competitors.

Guess' revenue rose 3% annually to $536 million last quarter, breaking a multi-year streak of top line declines. That figure was amplified by easy year-over-year comparisons and still missed expectations by $15.2 million. The company expects its fourth-quarter sales to rise 3.5%-7.5% annually, well below expectations for 10% growth. On the bottom line, Guess' earnings fell 27% annually to $0.11 per share, which missed estimates by $0.03. It expects its fourth quarter earnings to slump 12%-30%, which also misses the consensus forecast for 5% growth and indicates that the company is relying heavily on markdowns to clear out its inventory.

Those bleak numbers cast doubts on Guess' turnaround plans, which include opening new stores, expanding its e-commerce operations, and boosting its comparable store sales to top annual sales of $3 billion by fiscal 2018 (compared to estimated sales of $2.2 billion this year). They also make Guess' 6.6% dividend yield look unsustainable, since the company funded that payout with 120% of its earnings over the past 12 months. That dividend hasn't been raised for 12 straight quarters.

Ralph Lauren

Another victim of the fast fashion shift is Ralph Lauren, which shed more than 50% of its market cap over the past five years. Like Guess, Ralph Lauren's slow-moving, higher-priced apparel failed to impress shoppers, who flocked toward cheaper offerings.

Ralph Lauren tried to counter this trend by hiring Stefan Larsson, a former H&M exec who rejuvenated Gap's Old Navy brand, as its new CEO. Larsson initiated the "Way Forward" turnaround plan, which aimed to shutter about 50 stores and shed 8% of the company's workforce. However, Larsson quit in early February after leading the company for less than two years, reportedly due to creative clashes with the company's founder. In a statement, Lauren stated that both he and Larsson "recognize the need to to evolve," but had "different views on how to evolve the creative and consumer-facing parts of the business."

Ralph Lauren stock plummeted after that announcement, and for good reason. The company's revenue has declined year-over-year for seven straight quarters, and it expects its 2017 revenue to drop by "a low double-digit rate." Analysts expect its revenue and earnings to respectively fall 10% and 12% -- indicating that investors can expect a lot of store closings and markdowns as the retailer desperately tries to win back shoppers. Those problems all indicate that it isn't worth buying Ralph Lauren for its 2.5% yield -- which looks unreliable due to its payout ratio of 114%. That dividend also hasn't been raised for eight straight quarters.

The key takeaway

The retail apparel industry is a brutal one, due to fickle consumer tastes, declining price expectations, and the growth of e-tailers. This has made it tough for iconic brands like Guess and Ralph Lauren, which are too deeply entrenched in their brick-and-mortar ways, to thrive. Therefore, retirees should skip this tough industry and stick with lower risk income plays in other industries instead.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Guess?. The Motley Fool has a disclosure policy.

Author

Leo is a Tech and Consumer Goods Specialist who has covered the crossroads of Wall Street and Silicon Valley since 2012. His wheelhouse includes cloud, IoT, analytics, telecom, and gaming related businesses. Follow him on Twitter for more updates!